Pipeline Superstar Enbridge Springs a Leak

by Aaron Levitt | June 26, 2012 6:00 am

Logistics[1] is one of the major components of what we pay for energy, so any issues that affect our pipelines, gathering and storage systems could be cause for concern. Canadian pipeline superstar Enbridge’s (NYSE:ENB[2]) latest mishap could be one of those issues.

Two years after Enbridge’s worst-ever oil spill disaster in Michigan’s Kalamazoo river system, another one of its pipelines — this time in Alberta, Canada — has sprung a leak[3].

Citing a flange gasket failure, more than 1,450 barrels (230,000 liters) of crude oil spilled from a pumping station on Enbridge’s Athabasca pipeline. That key 540-kilometer system is one of a few major connections that couple Canada’s fertile oil sands at Fort McMurray to its largest and most important crude oil hub in Hardisty. It is there that oil gets fed into a vast network of export lines including Enbridge’s mainline and TransCanada’s (NYSE:TRP[4]) Keystone — all before heading into the United States.

Enbridge was able to bypass the pumping station at Elk Point and get the critical pipeline restarted — albeit at a reduced capacity. However, the spill still represents a major blow to its image. Perhaps more importantly, the recent environmental mishap potentially could be a major wrench in its Northern Gateway project and ultimately Canada’s exporting plans[5]. For investors, that could mean some real implications down the road.

Keystone XL Take Two

The incident caps off a challenging period for the energy logistic sector in Alberta. Earlier this month, a rupture of a Plains All American (NYSE:PAA[6]) pipeline spilled nearly 3,000 barrels into a reservoir and the Red Deer River. This follows a well gathering system break at a Pace Oil & Gas facility near the Northwest Territories border, which spilled some 5,000 barrels’ worth of crude into the environmental sensitive landscape.

These spills come at a critical time for Enbridge and the oil sands industry as Canada looks to begin exporting its bounty to emerging Asia. Prime Minster Stephen Harper has made it clear that Canada needs to expand beyond the United States as its major energy export partner. The government has even begun to fast-track several project approvals to meet this goal. However, getting those plans into place is easier said than done. Enbridge’s proposed $5.4 billion Northern Gateway pipeline to the Pacific Coast from Alberta continues to be stalled in months of public hearings and debates.

Opposition to the project continues to grow as well. Numerous British Columbian communities and environmental groups have aligned themselves against the project, arguing that the risks of a spill outweigh any economic benefits. These recent spills have only strengthened resistance to the plans. Environmental groups have now begun to seize on the number of current accidents, including another massive spill by Plains last year, to draw undecided citizens to their movement. Additionally, several groups have begun to call on regulators to increase pipeline safety and scrutiny.

Throughout 2010, Alberta averaged nearly two pipeline failures a day, dumping an average of 9,350 liters worth of fuel per spill into the province. That safety record isn’t sitting to well with voters. A poll by Canada.com[7] shows that more than 52% of B.C. citizens oppose the project, up from 46% in January. Likewise, support for a law banning oil tanker traffic on the British Columbian coast also has risen.

Similarly, opposition to the Northern Gateway from Canada’s various First Nation and aboriginal organizations has been extremely vocal[8]. The large Yinka Dene Alliance says Enbridge’s record of repeated oil spills demonstrates why the proposed project will never be permitted in their lands. More than 25% of Enbridge’s proposed pipeline would travel over YDA territories. Chief Martin Louie of Nadleh Whut’en summed up the groups point when he said, “The string of bad spills throughout Alberta and beyond provides even more justification to say no to the Enbridge pipeline.”

Will It Get Built?

Given the continued growing opposition, Enbridge’s project is quickly turning into another Keystone XL debacle[9]. That project was subsequently killed by the Obama Administration as various environmental concerns took hold. A provision in the payroll-tax bill ultimately forced the president to make an early verdict on the project — without dealing with those environmental issues.

The Northern Gateway could see a similar fate. Almost two years ago, Ottawa officials issued safety concerns about Northern Gateway project with regards to the fact that the company had an “insufficient” oil spill response plan in sensitive environmental areas. The recent spills aren’t helping the public forget those concerns.

Additionally, the political landscape in Canada is looking similar to that of the U.S. with regards to the Keystone. Current Liberal Premier Christy Clark hasn’t publicly weighed in about the pipeline, but her support is dwindling because of it. A new political poll by IPSOS[10] reports that Clark’s support is falling rapidly, and she’s now behind the anti-pipeline NDP party in the province. Clark has been rumored to be in talks with Enbridge and Alberta about getting a hefty payout for British Columbia for giving the pipeline the go-ahead. However, political analysts estimate that the price might be too high for such a deal.

Yet, Canada desperately needs the pipeline. Prices for bitumen crude from Alberta’s vast oil sands continue to be under pressure. A combination of surging production and tight export pipeline capacity has kept a lid on prices. According to a University of Calgary study, accessing emerging markets in Asia would help Canadian E&P companies realize a $13.60-per-barrel price gain by 2030.

So will the project get built? Realistically, it’s too early to tell. Public outrage is growing despite Enbridge’s and the Harper Administrations best efforts to move it forward. Odds are — just like the Keystone XL extension — the Northern Gateway approval will come down to some political pandering or maneuvering. Investors shouldn’t rest their entire hopes on the project.

While the pipeline ultimately would be a cash cow for Enbridge, the company’s long-term success doesn’t hinge on the pipeline being built. The Seaway reversal along with several other key pipelines already in place will continue to drive cash flows for years to come.

However, oil sands investors should pay attention to the fight. The Northern Gateway could ultimately be the lynch pin in the bitumen sector[11].

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.